When Should You Buy Bulletin Resources Limited (ASX:BNR)?
Bulletin Resources Limited (ASX:BNR) trades with a trailing P/E of 0.4x, which is lower than the industry average of 20.1x. While BNR might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Bulletin Resources
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for BNR
Price per share = 0.03
Earnings per share = 0.085
∴ Price-Earnings Ratio = 0.03 ÷ 0.085 = 0.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BNR, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since BNR's P/E of 0.4x is lower than its industry peers (20.1x), it means that investors are paying less than they should for each dollar of BNR's earnings. Therefore, according to this analysis, BNR is an under-priced stock.
A few caveats
However, before you rush out to buy BNR, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to BNR. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with BNR, then investors would naturally value BNR at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with BNR, investors would also value BNR at a lower price since it is a lower growth investment. Both scenarios would explain why BNR has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing BNR to are fairly valued by the market. If this does not hold, there is a possibility that BNR’s P/E is lower because firms in our peer group are being overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on BNR, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I've outlined above.
Are you a potential investor? If you are considering investing in BNR, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Bulletin Resources for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
